Jeff Bezos on Leading for the Long-Term at Amazon

ADI IGNATIUS: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Adi Ignatius, the editor in chief, and recently I talked to Amazon’s Jeff Bezos, who in are new survey, which appears in the January issue, comes out as the world’s number one living CEO. Here are excerpts of our conversation.

Jeff, thanks for joining us. When Amazon went public back in 1997, you wrote a letter to shareholders that said it’s all about the long term. Did you feel at the time that you were really challenging orthodoxy?

JEFF BEZOS: I felt that we were trying to make sure that we were correctly advertising the actual event. Warren Buffett has a really good phrase for this. He says, “You can hold a rock concert, and that’s OK. You can hold a ballet, and that’s OK. Just don’t hold a rock on and advertise it as a ballet.” And the job of the public company is to be clear about whether you’re holding a ballet or a rock concert, and then investors can opt into that.

ADI IGNATIUS: So what does it really mean from the perspective of a CEO to think in the long term?

JEFF BEZOS: Well, if you’re long term oriented, customer interests and shareholder interests are aligned. In the short term, that’s not always correct.

Also, we like to invent and do new things, and I know for sure that long term orientation is essential for invention because you’re going to have a lot of failures along the way.

ADI IGNATIUS: Jeff, you’ve said that you like to plant seeds that may take seven years to bear fruit. Doesn’t that mean you’ll lose some battles along the way to companies that have a more conventional two or three-year outlook?

JEFF BEZOS: Well, maybe so, but I think some of the things that we have undertaken I think could not be done in two to three years. And so, basically if we needed to see meaningful financial results in two to three years, some of the most meaningful things we’ve done we would never have even started. Things like Kindle, things like Amazon Web Services, Amazon Prime. The list of such things is long at Amazon.

ADI IGNATIUS: So how much do you care about your share price?

JEFF BEZOS: I care very much about our share owners, and so I care very much about our long term share price. I do not follow the stock on a daily basis, and I don’t think there’s any the information in it. Benjamin Graham said, “In the short term, the stock market is a voting machine. In the long term, it’s a weighing machine.” And we try to build a company that wants to be weighed and not voted upon.

ADI IGNATIUS: So does it make sense for Amazon to even stay in the hardware business, which is low margin and low profit for you?

JEFF BEZOS: Well, our approach to our hardware Kindle devices, Kindle Fire and our Kindle readers, is to sell the hardware at near break even, and then we have an ongoing relationship with the customer where they buy content from us– digital books, music, movies, TV shows, games, apps. And the reason that we like that approach is because we don’t make $100 every time we sell a Kindle Fire HD, since it’s near break even. Instead of making a bunch of money, then, we’re happy if people keep using our products. We don’t have to have you on the upgrade treadmill.

ADI IGNATIUS: You’ve said that you would be interested, if you had the right concept and approach, in creating a physical Amazon retail experience. Why even consider that?

JEFF BEZOS: Well, We like to build innovative things. We’ll look around the world, and we’ll be inspired by what we see. But we like to put our own unique twist on it and do something that’s not redundant. If there are 100 physical stores that are doing a great job, we don’t want to be the 101st. If we can find something that we think customers would like that would be differentiated, it would be super fun to do that.

ADI IGNATIUS: So would developing a phone also fall into that innovative category?

JEFF BEZOS: Yeah, absolutely. That’s the kind of thing where you would ask what is the idea? How would it be differentiated? Why wouldn’t it be me too?

ADI IGNATIUS: So do you fear is your biggest challenger?

JEFF BEZOS: Well, we don’t get up every morning thinking about what’s the list of the top three companies that are going to try to kill us? I do know of companies, and their annual planning process starts with the list of their three top enemies, and they work from there. They get motivation from the competitive zeal. Our approach is not to start with that list. We do look at other companies, and so we pay attention, but it’s not where we get our energy form.

ADI IGNATIUS: So disruption is obviously a rough business. Do you have any personal regrets about the pain that your success has caused to traditional retailers?

JEFF BEZOS: I’m just as sentimental as the next person I have lots of childhood memories of physical books and things like that. Our job at Amazon is to build the best customer experience we can in every way and then let customers choose where they shop.

ADI IGNATIUS: At what point will the goal change from lowering margins, building market share, to making a bigger profit?

JEFF BEZOS: Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.

ADI IGNATIUS: Amazon has done a great job of self-cannibalizing its revenue streams, going from Amazon Store to Amazon Marketplace, from print to ebooks, and so on. In most companies, moves like those would be hard to execute without organizational turmoil. How have you managed the transitions?

JEFF BEZOS: When things get complicated, we simplify by saying what’s best for the customer? And then we take it as an article of faith if we do that, it’ll work out the long term. So we can never prove that. In fact, sometimes we’ve done a price elasticity studies, and the answer is always we should raise prices. And we don’t do that because we believe– and again, we have to take this as an article of faith– we believe by keeping our prices very, very low, we earn trust with customers over time, and that that actually does maximize free cash flow over the long term.

ADI IGNATIUS: What have you learned about leadership from running what has become a very big company?

JEFF BEZOS: Well, I would say one thing that I have learned within the first couple of years of starting the company is that in inventing and pioneering requires a willingness to be misunderstood for long periods of time. One of the early examples of this was the customer reviews. One wrote to me and said, “You don’t understand your business. You make money when you sell things. Why do you allow these negative customer reviews?” And when I read that letter, I thought, we don’t make money when we sell things. We make money when we help customers make purchase decisions.

ADI IGNATIUS: How do you institutionalize the ability to come up with these good, misunderstood ideas?

JEFF BEZOS: Well, I think it’s a couple of things. One is we have a lot of internal stories that we tell ourselves about persistence and patience, long term thinking, staying heads down, focused on the customer even while being criticized.

The second is selection of the people. When they wake up and are thinking in the shower in the morning, they’re thinking about customers, and thinking about how to invent on behalf of customers, and they find that fun. And if you get here, and you find that you get your motivation from having a more competitive-focused culture, you might find our culture dull. We don’t. We find a culture intensely fun.

Some companies, if you wanted to put it into a single word, they have a conqueror mentality, and we have an explorer mentality. And the people who like our mentality of exploration and pioneering, they tend to stay here, and have fun here, and that’s self-reinforcing.

ADI IGNATIUS: You generated a lot of attention recently. Is all this publicity good for you and for Amazon

JEFF BEZOS: I have to be very choosy, and I’ve done less and less of it over time. And the reason that I’m doing this interview with you is I want customers to understand what makes us tick, how we operate, what our principles are. I think customers want to know who they’re doing business with.

ADI IGNATIUS: Well, if you don’t talk, how in the world can we misunderstand you?